What if I Can't Pay My Taxes? What Happens to Me?

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Question: I run a small business by myself. I’m 24 years old, and I started this a couple years ago. In 2017, I owed $15,000. I haven’t paid any of it yet. I haven’t filed my 2018 taxes yet, but it’s expected I owe around $13,000. Then I also have to set aside taxes for 2019. I can’t possibly save up for three tax years in a single year. Not while I am making roughly $90,000 a year between those two years. Typically, I end up making around $50,000 to $60,000 after I pay for upkeep and freelance development work. My living expenses are around $3,500 a month. I just don’t know what to do. I’d have to put 100 percent of my money towards taxes this year to catch up. I heard about an “offer in compromise” or something. I have 10 Grand saved I can use to pay something. What should I do? – Michael in Indiana

Jacob Dayan, Co-Founder of Community Tax, responds…

If you are unsure of your options, the best advice is to call a tax resolution expert to help determine if you qualify for any IRS resolution programs. These include…

• offer in compromise
• currently not collectible status
• an installment agreement
• one of the other IRS resolution programs

But I can give you the basics of the process…

IRS resolution basics

To begin, if you want to put yourself in the best position to qualify for an IRS resolution, the first step is to work on “compliance.”  Compliance means that you have filed the past six years of tax returns, starting with the most recent (currently the 2018 return due April 15, 2019) and paying all required Estimated Tax Payments for 2019.

The IRS wants to be confident that you will not owe in the future before they agree to a resolution program. So setting aside and paying taxes for 2019 is the most important payment to make at the beginning.

After compliance is complete, you will be ready to negotiate a resolution with the IRS.  In general, the IRS allows you to pay off the balance in full with a 72-month payment plan. Or it allows you to submit a financial statement to determine an appropriate resolution if you are unable to pay off in 72 months.

What is the financial statement?

The financial statement is basically a list of your monthly income, monthly “allowable” expenses (like housing, vehicle, health insurance, etc.), and a list of the value of any assets (such as real estate or retirement accounts). The IRS also allows you to count any Estimate Tax Payments as an expense on the financial statement so that you are not being stretched beyond your financial capability.

The IRS will reduce the monthly payment to an amount you can afford for one instance. That’s when the financial statement shows you’re unable to pay off the balance in 72 months with a combination of the value of your assets and net income.

You may qualify for an offer in compromise if you can’t pay for 120 months.

If your financial statement shows that you cannot pay off the balance within 120 months (10 years) with a combination of the value of your assets and your net income, you may qualify for an offer in compromise and the IRS will settle for less than you owe.

To learn more, read the Debt.com report, How to Settle Tax Debt.